Portfolio theory based approach to risk management in electricity markets: Colombian case study

Since 1994, the Colombian electricity market has been operating under a new structure. The Colombian government undertook a liberalization process, and trading activity was created. The traders face not only increasing competition, but also high-risk levels due to factors not considered previously. In the trading system, the agents are implicitly undertaking the risk associated with market variations and are demanding for new procedures to manage risk. This is an initial attempt to introduce an existing financial methodology (portfolio theory) to develop a risk management strategy for the electricity trading in Colombia which was developed in three steps.